David Einhorn Explains How Ben Bernanke Is Destroying America

David Einhorn knocks it out of the park with his very first statement during today's Buttonwood Gathering, in a segment dedicated to one thing only: explaining how the Fed's policies are not only not helping the economy, they are now actively destroying this country.

"Sometimes you have to look at what is the base assumption. because sometimes you have a groupthink around the base assumption and everybody agrees to the same thing and acts reflexively and doesn't really challenge what is going on. I think we have reached that point with the monetary policy. The assumption is that if you want the economy to improve, if you want more jobs, if you want more consumption, what we need is ever-easing monetary policy. My point is that if one jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have, and it gets to a point where it's not a question of diminishing returns but it actually turns out to be a drag. I think we have passed the point where incremental easing of Federal policy actually acts as a headwind to the economy and is actually slowing down our recovery, and I am alarmed by the reflexive groupthink of the leaders which is if we want a stronger economy, we need lower rates, we need more QE and other such measures."

And that, in a nutshell is it: everything else follows.

Because in addition to explaining the same fundamental error in the Fed's logic (from an economic standpoint; we already showed what the "market" error is, namely that instead of forcing investors to buy risk assets as Bernanke's wealth effect prerogative demands, these same investors are merely frontrunning the Fed's purchases of bonds and MBS, in what is truly a risk free, if lower-returning trade, and is key reason why ever fewer equity market participants are left, leading to lower bank revenues, bank employee terminations, lower Federal and State tax refunds, and so on, in a closed loop) it also points out the social aspect. At one point in the interview, Einhorn observes that traders and economists now have diametrically opposing views on the effectiveness of QE (no need to explain whose view is what). The reason for this dichotomy is simple, if crucial: we are now at a point where the entire practice of new-classical economics - the bedrock thinking of all modern soecity - is at risk of being exposed for a sham "science" which is and has always been absolutely flawed. Because when one day the Fed fails to prop up the Fed, and fail it will, all the economists that encouraged the Fed to do what it does, without grasping the true implications of 'diminishing returns', will be forced to fall on their swords (hopefully metaphorically but who knows). And with that the end of the shaman cult that shaped the modern world will finally end. But not before every single "economist" keen on perpetuating their job, their tenure, and their paycheck for as long as possible, backs the Chairman fully and unconditionally: anything less, any outright dissent within the economic cabal, would lead to a far faster unwind of the Fed's policy artifice even faster than it otherwise will fail.

Recall that this was precisely the dilemma before the Bundesbank as we explained yesterday, when it did what it had full right to do openly, yet did secretly, when it pulled its gold inventory from London: it implicitly confirmed it was no longer a willing participant of the NWO, and no longer is willing to sacrifice its sovereign independence at the altar of Keynesianism, and monetary theory.

But back to Einhorn, who presents one of the most coherent explanations why QE, contrary to the Chairman's "best intentions" does nothing to stimulate the economy at the consumer level, and why it effectively serves as a hindrance to future growth:

"Lower rates drive up the cost of commodities: oil and food. And money that is spent on oil is sent out of the country to the Mideast and it doesn't help, and takes out income from people's pockets that could otherwise be spent on other goods. The second [ZH: and this is by far the biggest thing that the Fed refuses to acknowledge] is that not being able to earn a safe return on savings, is causing people to hoard savings rather than consume. In other words if I know I am going to earn 3% in the bank I can spend that income and I can have visibility towards that, but if I know I'm going to earn zero in the bank, in order to figure out how much I need to save for retirement I need to save a much bigger number. Which means I can't spend much now, I need to save more now, to build up those savings for retirement. If I am already retired and I am on fixed income, my income has now really gone down and I have to hoard money so I can spread it out thinner over a longer part of my life. So by denying individuals savings or interest on income on their savings, it is causing hoarding which is driving down consumption which is hurting the economy."

As a reminder, in America consumption, not the government (which despite incorrect claims to the contrary has never created even one penny of wealth), is responsible for 70% of annual GDP. Is it any wonder that the Fed's own policies, done solely to protect the financial system, and to enrich those whose wealth is already primarily in the stock market (the infamous "1%"), are the cause of the ongoing catastrophe that is the destruction of America's middle class, which day after day sinks lower and lower?

Also, in direct debunking of all those Magic Money Tree (aka MMT) "economists" who say that government deficits are a great thing because the lead to higher savings, while maybe true on paper, Einhorn shows that the "expectations" component of behavior here is far more critical than what simplistic Econ 101 textbooks claim, especially the ones that were written long before anyone thought that the US would have a Zero Interest Rate Policy for at least 7 years (and likely more until the runaway inflation finally hits):

In terms of the savings, I don't think it's a zero sum, because it's a multiplier on the behavior. It's not just the income I am not receiving now. It is the income I don't expect to receive in the future as well. Now we are years years into [ZIRP] with a promise of at least three more, so that's seven years, and you are getting a change in behavior on a multiplied basis.

Finally, and touching on the previous point of why theoretical economists' views differ so much from those who practically make a living by being right for a change, Einhorn is laconic: "It's very hard for economists with models, with very limited sample sets and empirical data to understand [that we've gone beyond the point of monetary policy diminishing returns.] I think you wind up with a different view from people like me in the real world who aren't just trying to figure out what do the models say, but how do people actually behave.... We've opened up enormous tail risks of what happens if the Fed loses control, what happens if the Treasury loses control and these scare people and drive up risk premiums, and drive down P/E multiples and make companies defer long-term investments in the country because they are worried about significant tail risks these very aggressive policies are creating." And there you have it - someone please advise Paul Krugman and his cotterie of useless voodoo shamans whose only recommendation has always been more of the same. Pardon: much, much more.

None of the what Einhorn said in today's Buttonwood gathering of course is news, as he simply reiterated everything he said in his letter to investors from Tuesday, which is just as effective at explaining how the Fed's solipsistic illogical methods are bankrupting America. The key section in that letter is the following excerpt:

It seems as if nothing will stop the money printing, and Chairman Bernanke in fact assures us that it will continue even after the economic recovery strengthens. Specifically, he says, “Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we’re not going to rush to begin to tighten policy.” Apparently, anything less than a $40 billion per month subscription order for MBS is now considered ‘tightening’. He’s letting us know that what once looked like a purchasing spree of unimaginable proportions is now just the monthly budget.

Chairman Bernanke concedes that this policy hurts savers, then offers some verbal sleight-of-hand worthy of a three-card monte hustle: He says the savers are helped by low rates because low rates support higher asset values and promote a healthy and growing economy. He then goes on to say that because savers benefit from a healthy and growing economy, we must therefore have an accommodative policy. This in turn begs the question: Does an accommodative policy promote a healthy economy? Chairman Bernanke argues that higher asset values create a wealth effect, which he again describes, “if people feel that their financial situation is better because their 401(k) looks better or for whatever reason, their house is worth more, they are more willing to go out and spend.”

We have just spent 15 years learning that a policy of creating asset bubbles is a bad idea, so it is hard to imagine why the Fed wants to create another one. But perhaps the more basic question is: How fruitful is the wealth effect? Is the additional spending that these volatile paper profits are intended to induce overwhelmed by the lost consumption of the many savers who are deprived of steady, recurring interest income? We have asked several well-known economists who publicly support the Fed’s policy and found that they don’t have good answers.

And so on. If by now it is unclear to anyone that Bernanke is not only not doing anything to help America, or the world, but is merely accelerating this country's destruction, and perpetuating the same practices that result in breakouts of food price shocks leading to isolated genocide in those parts of the world without a safety net, then we congratulate you on your imminent receipt of a Nobel prize in Economics.

Finally, for those asking "what should be done", Einhorn's suggestion is identical to the one Zero Hedge has preached to its readers since day 1, nearly 4 years ago. And we don't even charge 2 and 20...

If Chairman Bernanke is setting distant and hard-to-achieve benchmarks for when he would reverse course, it is possibly because he understands that it may never come to that. Sooner or later, we will enter another recession. It could come from normal cyclicality, or it could come from an exogenous shock. Either way, when it comes, it is very likely we will enter it prior to the Fed having ‘normalized’ monetary policy, and we’ll have a large fiscal deficit to boot. What tools will the Fed and the Congress have at that point? If the Fed is willing to deploy this new set of desperate measures in these frustrating, but non-desperate times, what will it do then? We don’t know, but a large allocation to gold still seems like a very good idea.

So who should listen to: a failed historian-economist who has never worked in the real world, who has no idea how human behavior plays out in reality, who has lived in an ivory tower all his life, and who has never had to put his money where his mouth is, or a self-made billionaire? For us the choice is clear.

And for more context, here is what Einhorn said about the Fed in his latest letter to clients:

Central bankers have been on a money printing spree. In Japan, they expanded monetary easing by ¥10 trillion. In the U.K., the Bank of England monetized another £50 billion of gilts. ECB President Mario Draghi promised “unlimited” bond buying, and the Swiss are committed to putting a floor under the Franc through unlimited purchases of Euros and other assets.

This buying binge brings to mind American Express cards, which are famous for their promise of no pre-set spending limits. But as some AmEx customers have learned, there is a spending limit – they just don’t tell you what it is. AmEx anticipates how much you can repay based on your annual income and your payment history. When your charges exceed their estimates, they cut you off until you pay off your balance.

Central bankers should keep this dynamic in mind, as they continue to run their printing presses. While the ink may be endless, the market’s tolerance is not (though there is no sign that it is nearly exhausted). Like American Express, the market won’t let the central bankers know what their spending limits are until they have exceeded them and get cut off.

Here in the U.S., Chairman Bernanke announced desperate measures in non-desperate times. The Fed will be using its new AmEx Debasium card to buy a minimum of $40 billion per month worth of mortgage-backed securities…indefinitely. If the job market doesn’t show “substantial improvement” the Fed might increase its monthly MBS allocation, or head over to aisle 3 to pick up some Treasuries. When asked what would bring the binge to an end, Chairman Bernanke was more intent on emphasizing all the things that would necessitate further easing. In conjunction with the money printing, Chairman Bernanke has promised zero percent interest rates through the middle of 2015.

It seems as if nothing will stop the money printing, and Chairman Bernanke in fact assures us that it will continue even after the economic recovery strengthens. Specifically, he says, “Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we’re not going to rush to begin to tighten policy.” Apparently, anything less than a $40 billion per month subscription order for MBS is now considered ‘tightening’. He’s letting us know that what once looked like a purchasing spree of unimaginable proportions is now just the monthly budget.

One observation: it is not $40 billion. It is $85 billion as we said the day QE3 was announced:

New Normal market expectation: $85 billion in Fed Flow every month. Anything less is "tightening"

Because remember: exchanging Long-Term debt which has massive 10 year equivalent duration, with risk free paper, aka Operation Twist and of which $45 billion takes place each month (i.e., the direct monetization of all gross Treasury issuance with a maturity more than 10 Years) is merely another "Flow" type operation.

Einhorn continues:

Chairman Bernanke concedes that this policy hurts savers, then offers some verbal sleight-of-hand worthy of a three-card monte hustle: He says the savers are helped by low rates because low rates support higher asset values and promote a healthy and growing economy. He then goes on to say that because savers benefit from a healthy and growing economy, we must therefore have an accommodative policy. This in turn begs the question: Does an accommodative policy promote a healthy economy? Chairman Bernanke argues that higher asset values create a wealth effect, which he again describes, “if people feel that their financial situation is better because their 401(k) looks better or for whatever reason, their house is worth more, they are more willing to go out and spend.”

We have just spent 15 years learning that a policy of creating asset bubbles is a bad idea, so it is hard to imagine why the Fed wants to create another one. But perhaps the more basic question is: How fruitful is the wealth effect? Is the additional spending that these volatile paper profits are intended to induce overwhelmed by the lost consumption of the many savers who are deprived of steady, recurring interest income? We have asked several well-known economists who publicly support the Fed’s policy and found that they don’t have good answers.

If Chairman Bernanke is setting distant and hard-to-achieve benchmarks for when he would reverse course, it is possibly because he understands that it may never come to that. Sooner or later, we will enter another recession. It could come from normal cyclicality, or it could come from an exogenous shock. Either way, when it comes, it is very likely we will enter it prior to the Fed having ‘normalized’ monetary policy, and we’ll have a large fiscal deficit to boot. What tools will the Fed and the Congress have at that point? If the Fed is willing to deploy this new set of desperate measures in these frustrating, but non-desperate times, what will it do then? We don’t know, but a large allocation to gold still seems like a very good idea.

Rule # 3: Put one and two together. The Fed, the Treasury, the Presidents Working Group, Bernanke, and the Economic Oversight Committee are all one big sack of lying dog shit.

"QE is good for savers, cuz they get low rates". LOL. That reminds me of the psychotic statement he said about inflation a year ago: "Increases in food prices in developing nations is a direct result of the citizens of those nations seeking more sophisticated diets." I assume he was referring to corn and wheat.

David Einhorn's ideas have gelled remarkably quickly. He gave a speech a year or two ago that, by his own admission, got no attention of consequence. This speech appears to be high refined variant--Einhorn on Monetary Policy 2.0. I also suspect that he feels the need to become an expert on monetary policy in ways that he could not have imagined just a few years ago. This is the sad state of affairs, and I think David caught it well. This speech will not go unnoticed.

Savers are killed by ZIRP while Banks like vampires feed on that blood. This is not rocket science, nor is listening to voodoo high priests of the Bankers club which thinks that money is best served when they feel like it.

I've been writing about ZIRP kills for at least 2 years in ZH and they handed Socrates a cup of hemlock too for corrupting youth. There is progress; David Einhorn passes on the hemlock.

The whole game just channels human nature. Expand until you can't expand any further and then collapse. Rinse... repeat. Those who know the game make a killing on the up and the down.

Just cycles. But they are longer than our lifespans so we don't really see them so clearly. Funny how as the current cycle approaches it's logical conclusion the "rat race" is running so fast that most folks can't see past the next paycheck... let alone ponder 100 year+ planning. A game well played.

The problem at this turn is that the game found it's way to a whole new level. Globalization via cheap energy (oil) and technology. This cycle was like no cycle ever before in history. Makes the Mayans and Romans look like chumps. Makes thier civilizations look like ant hills.

I would like to believe that I am wrong about a lot of things. But, the fact there have been no real arrests for financial crimes says everything I need to know. It is really that simple. That and the inescapable math the promises made cannot be kept and cash flow is all we have now keeping the machine ticking.

Or to paraphrase Griffin (Creature from Jeckyl Island): The name of the game is bailout and its method is debt-backed money. Debt is slavery in every practical sense. So, everyone on this board knows how to free themselves.

Ron Paul begins and ends that argument from me. I'm not a US citizen/voter but I can see he certainly knows his stuff, whenever it makes it online past the 'official' candidates of your current 'election' 0.o

there are 3 references i found to be of interst. old money moving to the fed to be replaced, a mention of a (one time) government stimlus package for local government, and an fbi assult unit that has NO finess or means of dealing with anything without blowing it up first. and actually the main plot is a lil scary in itself. Savage got it right...do we really need money?

Einhorn is wrong in thinking these are "non desperate times". he also makes it seem so simple to stop QE. Thats prob why he steers clear of discussing the massive debts and deficits. Until you clear the nanny state they will need to keep monetizing the debt. I imagine a guy this smart knows this.

I would love to hear one even semi logical explanation as to how the Fed unwinds its current balance sheet in anything remotely approximating an orderly fashion, let alone the balance sheet the Fed will have in about 18 months.

The FED is the Shit Abyss, a cesspool used by the banksters to dump toxic shit loans into.

I am just waiting for Jamie Dimon to demand the FED pay him in gold (or silver) in return for the toxic MBS shit he flushes at the FED. At full face value, of course. As Joe Biden would say, "That Jamie has balls the size of cue balls".

They all play this stupid patty cake shit. Skirting the real issues and the real risks. Even Ron Paul played this game. No one yet has really come out said like it really is. Am I surprised... not really. The majority of society is not prepared to hear the truth. Most would reject it immediately and believe the messenger was insane.

The problem is, these guys all earn their living playing with other people's money. Much of their customer-base would not be COMFORTED by a detailed description of the problems facing us today.

It's not a failing on their part that they want to keep their jobs. No one wants to invest in a hedge fund run by a guy who says, "Well, everything is fucked up and bullshit because of all this Fed shit."

Not a single one of the people in Congress are willing to stand up and expose the FED for the bankster controlled criminal enterprise it is. I think they like the fact that the FED is willing to go along with the deficit spending that both sides love to do. Every congressman is just there to collect checks and benefits for themselves and their staff, the Country be damned. The parasite banksters are trying to suck out every last bit of real wealth by whatever means necessary, including destruction of the US economy.

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."

This. Einhorn knocks it out of the park and then falls flat on his face rounding the bases...

I have serious reservations that he's simply playing coy. Judging his historical understanding and wisdom versus Hendry's seems like a complete mismatch. At least Einhorn admitted in a few instances that he didn't have the level of understanding necessary to comment. The man benefits from contrarian views, but does not have the horsepower necessary to handle even rudimentary questions or handle a pre-arranged speech.

Einhorn painted himself into a corner. On the one hand, the FED's monetary policy has become a drag/negative on the economy. However, when asked if raising rates would help the matter, he states yes, with a caveat, that it would have to be cleverly done so as to not blow up derivative books. He really started stumbling around at this time. Look bud, if you can admit that the monetary policy is a negative on the economy (and punitive to the rest of us given the cantillon effect, among other things), then how can you possibly justify not ending it? Immediately? You've told us all we need to know... either you are an idiot or you are a total coward.

The other problem with Einhorn's perspective is that people are incentivized to save more. I'm not sure what planet he's living on, but on Earth, saving is a luxury most cannot afford. The concept of people saving more for retirement because of low rates is completely preposterous and only applies to a very specific segment of the market (probably older than 45). People younger than say 45 know, for sure, that there is no retirement...

I'll posit that the opposite is true and it is masked from the statistics because of the demographics of job creation/continuation. For those of us that actually do our own grocery shopping, we are completely and totally incentivized to SPEND, not save. We are incentivized to spend everything we can on durable goods and food items to ensure that we can make it through the harder times that are surely to come (these items are dramatically increasing in price). If lucky, a little bit might end up converted into real money and lost at the bottom of the local fishing hole. The reason this type of activity is masked from the general statistics is because younger people don't have jobs or have lower paying jobs... and have not had a chance to accumulate assets that have any chance of sustaining us. It's a tale of two cities.

Einhorn also completely and totally dropped the ball when answering the question on small business lending. The man talks about banks getting 0% loans from the FED and J6P having to pay much higher rates to borrow. He states that (unlike the banks) it is cost prohibitive for him to borrow because of the rate of return he will receive on the loan proceeds in the present environment. Einhorn answers by saying, I'm not sure about your specific situation, but I believe based on small business surveys that similarly situated peoples' needs are being met. REALLY? Shove it Einhorn. The laces were out.

"The other problem with Einhorn's perspective is that people are incentivized to save more. I'm not sure what planet he's living on, but on Earth, saving is a luxury most cannot afford. The concept of people saving more for retirement because of low rates is completely preposterous and only applies to a very specific segment of the market (probably older than 45). People younger than say 45 know, for sure, that there is no retirement..."

I think if he would've said spend less instead of save it would be clearer. A frightened population will impulsively tighten its belt and spend less (or save) so it really depends upon which illusion the particular person is perceiving. Bernanke wants to create the illusion of financial security by means of a rising stock market but if I can only relate to my savings account accruing as financial success then I will not perceive the relief that Bernanke is hoping I will.

So I think Einhorn is more right here because I think that more people can relate to a savings account growing (as a means of making them feel financialy secure) than they can a 401k statement. Even if they don't have the extra cash to put into a savings account it is still a perception that they can understand easier which would lead them to feeling less frightened.

All of this without addressing the ability to save... Again, Einhorn is speaking specifically to the types of clients he has (wealthy, over 45)... for this demographic, they might feel like the FED's policies are making it harder for them to save for retirement...

Who do you know that's under 45 that has a savings account? I sure as hell don't know anyone with ANY money in it... if there is such an account, it is routinely raided for over consumption/unexpected cost increases for the monthly tab. It isn't a savings account, but more of an emergency account.

Einhorn specifically used the example of retirement... I don't think you can put words into his mouth. He fumbled upon enough other issues to warrant second guessing. I'm also not sure of the practical difference between "spending less" and "saving", but maybe I'm just weird.

And maybe I am reading too much of my own beliefs into his article but I've always held that the ZIRP policy is much more damaging than what appears on the surface (no incentive to save) because you are messing with the Psyche of a population that has been conditioned to believe that savings was the path to wealth. And what happens when you uproot someones foundational belief (in this case they are trying to save but find it does them no good). So whether they are able to save or not you still have created a conflict in what they have always held to be true.

In this case there is a difference in not being able to save and learning that saving will do you no good. THe person who is unable to save will always place a portion of that blame upon himself thinking that he could've cut back a little more but the other is akin to a religous man learning there is no God....okay I'm going overboard here but you get my point.

I suspect you're right. Einhorn understands the symbiotic relationship of the Fed/US government perfectly well. About 2 years ago, he said (I'm paraphrasing here), 'Gold will be a good investment as long as the government has a deficit. Keep buying gold until the budgets are cut.'

It's amazing that the Fed is willing to destroy itself in the process. Because if the country goes(and it's going) so soes the Fed as the value of its balance sheet will likely plummet.

If nothing else, you'd think ther Fed would have a clue about the art and science of self preservation. It's owners must be some pretty powerful people to force a kamikazi style strategy of QE till death.

Well America, you had a good run. You know, the Sopranos and that red doll that would laugh.

the Fed, as Jim Sinclair rightly says, has no viable (policy) alternative.. it's a question of do we crash now (which would be better, let's have the pain please) or do they cling onto their jobs, giving them futile (but there's always hope!) something could save them

it's the political way to cling onto their jobs, say "All is well" and kick the can. Political expediency

there's an alternative however, people take matters into their own hands and pull the plug themselves on this shitshow

Stop Paying Tax... that'll flush em all down the toilet, Wall Street included

will people take action? Nope, most of them will also cling on to the bitter end in hope. Ho hum

Bringing it down is the Plan. That's why theyre all taking similiar actions around the world. Crash all economies . . . and then offer the 'solution' of a New World Order with a new global currency which the banksters control. (Though for awhile they let it appear that each country has its 'own money') Monetary & financial control and decision making will no longer be made nationally.

Absolutely.. if not Bernanke than somelse doing the same thing. Bernanke is Greenspan's clone.. without the hubris. The root cause of the Feds currency debasement is the losses incurred by the banksters, fraudsters, free spending politicians and war profiteers.

Someone posted this video the other night (whoever you are, thanks). I really think it's worth viewing. For some reason (which should be clear after viewing the video), now every time I hear "buy Gold"....I recall this video with alarming affect.

And, the fact that when the FED does raise rates it will be meaningless to the savers due to the fact that their savings didn't grow through compounding interest, and any inflation up to that point will destroy any pricing power they will be accruing from the new interest income.

Help a poor dumb non-economist out here. The Fed is buying $40billion per month of MBS's.........what is that $40 billion number based on? Face value of the securities? Or market value? Who is receiving/benefitting from this purchase?

I would guess they already bought off all the shit assets at 100% on the dollar - now they are buying all new mortgages., so when they collapse the economy and send us into a temporary deflationary depression, 70% or so of these mortgages default and the Fed owns all the real estate -so what if all the mortgages are underwater -the Fed just does an accounting entry , prints money, and eventually creates hyperinflation and they own all the hard assets. Kind of like the great depression wherre the Fed contracted the money supply, foreclosed on millions of home and farms and businesses, and then opened the spigots when they wanted to fight WW2-then there was unlimited money avaialble.

As far as the unsterilized purchase of the 40 bln in MBS per month by the Fed, it's banks and government GSEs (Fannie Mae & Freddie Mac) that are benefitting the most.

The Fed literally doesn't care if it's receiving fairly valued assets for the fiat it is paying for these MBS, as the goal of this aspect of their operations is to provide a lifeline of over-payment to these entities which are choking on MBS that they could otherwise not find any buyers for (if they did sell these MBS to buyers other than the Fed, it would have to be at values that would render these entities even more insolvent than they already are, hence requiring even more recapitalization).

It wouldn't shock me if the Fed is paying a 200% premium over and above what competent buyers using appropriate due diligence and comprehensive models of return would pay for the same assets.

That's kind of a shallow way of looking at it. The principal actors actors of the fraud and charade are the benefitting parties. The people who work for these organizations and who are getting to withdraw salaries, bonuses, and have someone to buy those stock options/holdings. The longer it goes on, the more they get to extract. When the "mothership" blows up, it's going to be all of these folks who get to pick through the rubble for choice assets. Moreover, there will probably be an asset purchase option for pennies on the dollar to the principal actors (already happening) where public bidding (you and I) is heavily curtailed.

In the end, none of these organizations matter. They're simply shields for the principal actors and, when the time is right, they'll be demolished via lawsuits, pitchforks, etc... falling on the sword so to speak... while the majority of the real culprits roam free with their plunder.

anyone who thinks that the fed and its banksters give a rat's ass about the economy has a jelly donut for a brain....bewailing its wickedness will do nothing ... voting for obamney will entrench this terroristic destruction of america....you put down the occupy movement so that you can whine on a blog? bitch, please.

maybe einhorn realizes how much weight his words carry.maybe all it takes is a few guys like him to get people to stop it with the stupid "don't fight the fed" crap. maybe a few guys like him can start that snowball rolling downhill.

"You my friend [Bernanke] are all that's left of that ancient keynesianism."

Japan has been doing it non stop for 25 years. Much of Europe is also pro-Keynes, except for a few of the northern members (Germany, Netherlands, etc). China is using it. Half of Africa uses it (ie Zimbabwe). From what I can see Keynes has nearly risen to omnipotent, and Austrian Economics have been nearly wiped off the map. Face facts: Politicians like handing out free money. It was gets them in office and keeps them in office.

Money printing will continue for years, even after it breaks currencies. FWIW: ON CNBC Ludlow interviewed a Mittens insider, who suggested the Mittens intends to keep rates low after Mittens wins the election. The only Presidental candidate that was really against it, Ron Paul is out of the race. Although I doubt Mittens will win.

This is so spot on its not funny. David is one of those rare brilliant people who describes things so simply and clearly they should be obvious even to misguided central planners. What he says certainly rings true for me. Since 2008, I have continued to look for ways to cut costs since safe investments earn zero and macro imbalances continue to build rapidly. Why would I spend equity market gains that took years to build, but can be gone in 4 trading days?

If the stock market tanks again, his multiplier effect will go exponential causing a self-perpetuating contraction. If you go in a recession, most people save extra cash and pay down debt, or they lose something. You take the negative real returns over the past 5 years, lack of yield and as Einhorn states, the outlook is for continuation of present conditions, and as he says people actually start saving more - the replace the "lost" yield with more capital buffer (increaseds avings). Also, the low rates do not necesarily provide adequate risk-adjusted returns, even with leverage, so investors balk.

When you buy a deal with 20% down and 11-3/8% mortgage interest, the asset price is probably lower than when rates are 3%... so if rates drop from 11-3/8% to 7.5%, you have extra cash flow to extinguish the debt, or buy another property. It worked at 11-3/8%, its bonanza at 7.5% and you owe less than if you had bought when rates were low.

QE is not really economic stimulus, it is bank recpaitalization and triage... any economic stimulus is simply a knock-on effect. The final destination is some sort of global trading currency after the dollar is bonked.

QE is about 1) the technical ability to allow the U.S. to maintain its current rate of deficit spending via the suppression of interest payments owed on the debt, and 2) recapitalizing what are in reality insolvent banks by paying them prices representing multiples above FMV for the worst assets (net liabilities) they are carrying on their balance sheets (cash for trash).

No shit! Eliminate Repuchase Agreements from GAAP so we can see what is really on banking balance sheets.

Without REPO banks many banks would be insolvent and go bust and good banks, WF and CU would florish.

We need transparency to instill confidence. My money goes into savings. I refuse to be a muppet. If the markets are reformed and I am given an even playing field I might return. I'll take my chances making .01% return.

If you raise rates, financing the debt is prohibitive and, if you keep rates low no one will get off the fence and buy real assets knowing deflation will result thinking they can buy for less in the future.

The problem, as he stated is not monetary policy, it is the lack of fiscal policy.

The Congress needs to institute a five year plan to cut spending though attrition raising rates in proportion to spending cuts achieved through attrition. Trim defense spending by not planning new projects and letting projects not wanted by DoD fade away by cutting 5% of spending in needless projects each year and reallocate funding to cost effective programs to protect and defend the constitution.

A substantive cut in Defense is being heard more and more as a way to address the deficit and in fact reduce the competition for resources that keep prices high in a hidden inflation that no advocate of the current monetary policies will admit is there. It sounds great. It will never happen until the checks literally start to bounce . The reason is fairly simple. It was never just the Military Industrial Complex that people referred to that causes the guns over butter problem. It’s the Congressional Military Industrial complex that makes cutting unnecessary and redundant costs out of the system impossible.

Individual Members of congress are graded by how much money they can bring back to their state and districts. As a result, a significant part of the money wasted each year is promulgated by congress when they insist that the military continue to buy "guns" made in their district.

Example; before the 2008 elections, (S) Susan Collins was using her position to demand that the navy make additional Aegis destroyers of a certain type that cost 3 billion each because they are made in the Maine Ship Yards. The Navy resisted the push, but finally gave in as Collins and friends used the leverage they have to force the unwanted ship(s) on the Navy. Collins has been a popular senator in Maine because she has been able to maneuver her way in the Senate to such a position that the Main Ship Yards always have a large order backlog from the DoD.

On the other hand, The Military may want something that is increasingly unpopular like the F-22, which was finally cancelled, but not before it wasted nearly 100 billion dollars bringing the cost per Plane that we did buy to 376 Million apiece including program costs . It is 176 Million a plane if we were to exclude program costs and ordered more. This is the fighter Jet that was a solution for a problems that were imagined , not real, that no longer were possible to use as an excuse to keep the program going. After one set of reasons to buy were knocked down after another the Dod finally settled on: "Well we've sold so many of our main line fighters to countries that conceivably be a threat, we have to have a better fighter to fight our own fighters. Then to further justify this circular logic that would bring Excel to its knees begging for Mercy, the Military had factories in 44 states build parts so a majority of congress could justify the continuation of funding. It finally took Defense Secretary Gates behind-the-scenes-push to end the program. One of the back breakers was when Lockheed Martin calculated the 50 Year maintenance cost on the existing fighters would top 1 Trillion dollars. Pretty good for shareholders when 20 Billion in revenue is guaranteed for 50 years that undoubtedly would rise each year as a result of “inflation” to maintain a fleet that is not needed in any scenario that anyone could envision.

These large , extravagant programs are very popular with the Military and Congress, yet if we look back at some of the weapons that are still mainstays of our arsenal like the B-52 ( made in the the 1950s) and our SAW (Squad Automatic Weapons) that are based on the design of the MG-42, the machine gun the Germans made in WW11 that scared the shit out of all of it’s enemies and finally the favored method of war fighting against the US. An opposing force doesn’t have to win battles to win wars. They just have to make the cost of making war so high that the US is forced to pull back. They spend a fractionalized percentage point against what we spend but get a 1000 times the bang for the buck. The ones who suffer , naturally, have been the individual troops, as force protection has never been a very high priority in DoD spending.

Finally look at (S) Lindsay Graham go into a hissy fit whenever the automatic budget cuts they he agreed to are discussed since they cut the “growth” of the DoD budget , not the existing budget. His mission in life now is to find a way around bipartisan legislation to cut spending across the board by excluding the Dod from the cuts that were never really cuts, but cuts from growth.

What you are describing is the real form of Keynesianism in the U.S. - Military Keynesianism. It is the bedrock of what's left of the "real" economy in this country. That is why military spending will never be cut back to any meaningful degree.

Make attrition the mantra to, slowly, get us out of this mess we have been compiling for 60 years.

The ECB's ways will never work. Austerity is a recipe for certain disaster.

We need people smart enough to understand cuts through attrition can be mitigated by industry and gov't so the situation will start to improve over time.

The gov't/military needs to stop competing for resources with the consumer.

The equity lost in the housing bubble will never return and the FRBNY should not be so disingenuous to think they can recreate the mystery equity, that vanished like a fart in the wind, with QE and ZIRP.

Only a true leader will take the log out of his own eye before trying to take the splinter out of ours.

I'll say it again: The equity lost in the housing bubble will never return.

The financial authority needs to own up to this and the fiscal authority needs to engage in prolonged, announced, planned attrition to address the current malaise and not "cut off the nose to spite the face".

Vaguely related, you often see complaints about "foreign aid." The vast majority of foreign aid is money that the government gives to foreign governments SOLELY for the purpose of selling them products we don't have any use for anymore. So while it'd be nice if we ended that charade, it would also be a hit on "the US economy" if it were ended.

punishes savers
rewards the wealthy and well connected
under-writes risky and inefficient behavior
rewards less productive behavior
disincentive productive risk taking as in invention and development
disinsentive to government to take difficult measures that may be politically risky
spare enterprises and management which should have failed

It once would have been the case that the wealth I have, measured in dollars, was three times enough to carry me through retirement. I was essentially guaranteed my present lifestyle could continue until I died.

That is no longer the case.

Thanks to the policies and practices of the Fed and Wall Street, there are no investment opportunities within the realm of reasonable risk for my age that can guarantee me that outcome.

That’s a failure of our monetary system by any measure from my perspective.

Disagreeing with me only confirms that you don’t give a shit about my perspective, which pretty much describes anyone and everyone who supports and controls our present monetary system.

You bring up another possible reason for QE: To force workers to keep on working so they can't withdraw from their 401Ks, pensions, that are essentially insolvent. Imagine if all of the working boomers choose to retire insteed of working longer. The house of cards would come crashing down, as their would not be sufficient capital to support their retirement.

FWIW: I am nearly the same boat, but a bit younger, but I have a simple plan: Convert capital into real assets that will provide the means to be self-reliant since cash will eventually become worthless. When I am unable to support myself, or if my health deteriorates to the point I can't be self-reliant, I will just check-out. I have no dependants to worry about (no children). I absolutely refuse to become destitute. Hopefully you can work out your own plan.

The thought that "they're never going to stop until somebody stops them" has often crossed my mind in recent years. Sometimes I even said it out loud to a friend I thought could handle the ugly truth without jumping off a bridge or curling up comatose in the fetal position.

From the article, and said better than I ever could: "While the ink may be endless, the market’s tolerance is not (though there is no sign that it is nearly exhausted)."

Only thing missing was the next obvious point which would go like this: "Unfortunately, by the time there ARE obvious signs that the market's tolerance has been exhausted, it's too late. Just ask anyone in a southern European country."

Unfortunately, the QE cannot stop because it is not being done for the economy. QE is being done to support banks in their insolvency and government spending. It just can't be stopped until after the big print when they decide to just fix the system.

Bernanke's action has a huge impact outside the US too. Bankers are not destroying the US only but the entire global economy, including China's.

As long as the media refuse to report facts, nothing will change. I may be naive to believe that the media could make a difference, but before it's been tried I won't rule out the power of truth (not opinion).

Ben is the last magician, our very own version of Randall Flagg (of The Stand fame). The old paradigm of growth for the sake of growth in order to maintain the ponzi is at an end... We had better come up with a new value system...

distant and hard-to-achieve benchmarks for when he would reverse course

This is the crux of it. This is the big lie. This is the fraud being slipped to the taxpayer by the banks and the Feds money printing spree.

What appears to be an obligation of theirs which they must ultimately deal with is in fact a passing of their losses to the masses. One day we will all be responsible for the entire balance sheet of the Fed, not them. It’s just another form of national debt in disguise. It can never be unwound or reversed under any foreseeable circumstances. We will all be responsible for settling it one way or another, not the banks.

In a general sense, the entire balance sheet of the Fed can be viewed as the wealth that has already been or will be transferred (stolen) from the American people by the financial elite. It’s the new face of organized crime.

What, so we must ask, is central banking good for when it is not even able to guarantee a stable price level (see chart 3)?

Why keep a quasi-dictatorial creature within the government body that operates largely outside of public control? Why hold on to an institution that more often than not has failed to provide full employment and price level stability? By these criteria the Fed has indeed been a failure. What then, we must ask is the true mission of central banking as one cannot calibrate accurately the effects of monetary policy on the real economy and price level? The answer is provided by the historical origin of central banking. As Rothbard and other authors such as more recently Lawrence White have shown, central banking grew out from the cooperation between the state and the big players of the banking sector. The deal that was struck said that the big banks will finance government and that the government won’t let the big banks go bankrupt. For that purpose a lender of the last resort was installed in the form of a central bank which would obtain the privilege by the government to produce unlimited amounts of fiduciary money.

Historically the scope of discretion was restricted by the gold standard at first, yet over time the various constraints have been removed step by step beginning with World War I. With the so-called Smithsonian agreement of 1971 the last anchor for the US dollar fell. At the day when President Nixon fully abandoned what was still left of the gold standard, the starting gun was fired for the escalation of the financial sector to grow into its current gargantuan proportions. In tandem with the expansion of the financial sector, government grew its public debt into its current colossal dimensions.

While central banks are effective as lender of the last resort and thereby to safeguard the big players of the financial system from going bankrupt, they are not only incapable of promoting economic growth, employment and price level stability, they are in fact the major perpetrators of the business cycle. Always under pressure to set the interest rate as low as possible, central banks provoke artificial booms which inevitably must result in a bust. The big players in the financial market can profit on the way up without fear about the downturn as they can rely on the central bank to bail them out.

In an academic paper Bernanke (2001) and his co-author argued explicitly that central bankers should not try to prick asset bubbles but stand ready to bail out banks and financial institutions when the bubble bursts. In his speech as a Governor of the US central bank on “Monetary Policy and the Stock Market”, Bernanke declared in 2003: “The ultimate objective of monetary policymakers is to promote the health of the U.S. economy by pursuing our mandated goals of price stability and maximum sustainable output and employment. However … monetary policy actions have their most direct and immediate effects on the broader financial markets, including the stock market, government and corporate bond markets, mortgage markets, markets for consumer credit, foreign exchange markets, and many others.” The message was well understood. The big players in the financial market could rest assured that their central bank would bail them out when a new episode of the lending spree began - the housing bubble. Operating as bailout machinery for the financial system, the US central bank has thoroughly infected the monetary system with moral hazard.

The strategy of governments and central banks is clear; lower interest rates and pump money into the system in order to re-inflate asset prices and releverage the economy. Although they have been very successful at debasing their currencies, they have missed a very key point. That is, an increase in money supply growth and inflation does not equate to an improving economy. And when taken to the extreme levels we see today, it instead leads to a protracted period of persistently weakening economic growth.

Money supply growth should never eclipse labor force + productivity growth. When inflation rises faster than GDP, malinvestments are created and asset bubbles form. That is especially true today as we see a tremendously-dangerous bubble being created in all the bond markets of the developed world. But what is also true is that government debt that is being systematically monetized by central banks is slowly destroying any confidence left in fiat currencies. As more and more credibility is lost in paper money, GDP growth will continue to decrease in real terms.

As long as governments continue to produce massive annual deficits that are purchased by their central banks, the global economy will continue to stagnate and inflation will increase. What is also true is that equity markets tend to rise over time in nominal terms because excess money creation lowers the value of currencies and raises stock prices. However, the increase in equity values seldom keeps pace with the rate of inflation. To accomplish the goal of achieving a real rate of return on investments after taxes and inflation are considered, history proves that can only be supplied by owning hard assets.

Tyler, you have been spot on the entire time. I'm sorry I missed the first three-quarters of Zero-Hedge everything since then has been great. Worked downtown for a long-time I saw the game played, Einhorn is so spot on, D.C. is just another profit center for the squid.

Agree with everything in principle, but I'm about certain the Bernanke believes he can pivot at the end into a solution.

The entire WORLD wants to keep the US dollar around--it's not just us. It's like a MAD scenario--he'll continue working to blow up the dollar UNTIL the rest of world decides to cave and we can launch a new financial hegemony.

It may require a lot of unsavory steps on the path to that conclusion, so we should be expecting plenty of war and civil unrest around the world, but it looks like a pretty obvious approach when you understand that the Fed can't fix our dysfunctional government.

Besides, maybe Romney will win and he'll appoint a different guy to carry out the same plan. That'll fool a lot of folks for awhile, I'm sure.

To be honest I am always thinking what is it that makes a good ECCONOMIST, or what these guys who earn monstrous salaries as lecturers, consultants or think-tank members and sometimes top it up with Nobel Prizes do for wellbeing of our economy that if we-God forbid- were denied them; would have had to face? Would such circumstances have been worse than the present situation or the way the economy was in 2008 and 2000 before it or 1995 or 1983 or.. 1929? I am usually polite and do not wish to start changing that trait, however, it is reasonable to ask what those fancy algorithms and mind boggling jargons and predictive software this lot have given humankind so far has achieved? What a world without these presumptuous pompous do-littles would look like?

Beyond doubt, this question is one of the main issues we should be tackling if this debacle called US economic mismanagement, Macro and Micro scale is to come to an end. For those who might disapprove the existential nature of this question, I say this: If you read the type of material written in this site (unless you are paid to nose around and find suitable candidates for DRONE targeting) then you must have developed at least the suspicion that your entire life has been manipulated, from day one in a Mafiosi style operation headed by illuminati at umpteen levels, only the lowest of the lows of them mascaraed as President, Prime Minister or even Fuehrer, king and Queen of societies. At any level, these psychopaths could not give a damn for you and your nearest and dearest’s life or death as their main objective is perpetuating this gigantic Ponzi scheme which has been going on for centuries.

Now the question of the role Economics as science and Economists as adherents to this discipline arises. The assumptions is that Economists are gurus capable of understanding human societies, nature of man and what makes him tick, as well as solution to old age questions of role of money, paper money, production cycle and value generation plus other things like what we should be doing with our time on earth and a few other small queries.But here comes the first disconcerting doubts about such assumptions i.e., if these high Priests were of any use, you should not have been reading endless articles and see discussions in serious media about what money is, how we should be expressing value in a culture, what happens when value is generated and how it should be distributed and above all what is the true meaning of usury?

AS soon as this wave hits the land, then the low height of this reclaimed land from ocean of ignorance becomes apparent. It does not take long for ordinary thinking man to ask, what is the use of Harvard Business school, if they have been ignorant of the fact that some people are running a Ponzi scheme on global scale in which some fraudsters have been giving Monopoly type paper currencies and with that they surreptitiously have been continuously rubbing the result of toil of millions upon millions of people and also rub them from their health, wellbeing and dignity?

What good has been these vast array of university colleges and schools as well as governmental research institutes and think tanks if they were not aware that these con-men and women, force people into adopting life practices which results inlosing their minds and being numbed with drugs, alcohol, sex and pornography. By following such policies they are able to dissociate the humans from their deepest values in the name of modernity and advancement while all they are doing is sucking blood from the veins of human societies. Sometimes this is figurative as it happens in US with millions of ignorant sheeple glued to see the diabolical ins and outs of Kardashians or Michael Jackson of the world or any other depraved humanoid which gives the semblance of normalcy to the viewers’ mind exploding lives. But sometimes it is not figurative at all but is murder and mayhem in the lives of innocent people whose crime is having been born in places with oil or gas or uranium under their feet. In that case the blood is spilt and bones crushed and electricity passed through genital parts or sons and daughters are raped in front of them to cause awe, fear and subdue such natives.

If the response to those rhetorical questions is that they neither have been aware nor think it is of their doing, then at least they must stand trial as false prophets for giving respectability to this Ponzi scheme. Not only they are suspect for giving legitimacy to this fraud but they have been instrumental in silencing anybody who had not been bought or sidelined or liquidated by illuminati, and has tried to alert the others against such axis of evil with its hidden agenda.

One might ask where have these MENSA members with nice ties been when we needed them to stand up against activities presented as economic policies, liberal or conservative which have been wreaking havoc with human beings lives, values, happiness and even very existence? What were they inculcating into the heads of us about meaning of life as gathering dollars and more dollars as the nearest thing to a paradise on earth while knowing full well that such premise was not attainable ever through this paradigm? Who gave orthodoxy to dehumanizing people in the name of maximizing profit except this lot? Who should have objected to forming this outrageous philosophy that making a Buck and climbing the ladder of success is legitimate even if it means breaking bones or pilling dead bodies to form the steps for such a ladder? Who were those except such pseudoscientists to give credence to ways and behavior of the most despicable type’s human race has produced?Who should bring to task these charlatans who as disciples of a compilation of mumbo-jumbo which not only is full of contradiction but also lacks the rudiments of a scientific discipline, i.e., power to predict according to its principal notions, muscled into areas to which their pea brains had no way of accessing. Church and other establishments safeguarding wellbeing of humans before total surrender to the evils of Capitalism and Liberalismand final degeneration were bled to near death in the most preposterous charade of new morality of materialism by non-other than these band of pretenders. Obviously, the deafening drum of technology and positivist agenda in science and philosophy were also accomplices, but perhaps alongside psychiatry, this was the biggest den of swindlers erected for the formation of the facade needed for new dress on the horrible skeleton of modernity which is to be hidden from the eyes of the populace.